Shares of FedEx surged 12% after the company reported third-quarter results on March 17. The company beat earnings forecasts by 7%. Profits rose 18% on a 9% increase in revenue. Earnings per share were up 24%. For the full year, management reiterated guidance of 20% to 22% earnings-per-share growth for fiscal 2016.
That works out to full-year revenue of $50.1 billion, up 5%, and profits of $3 billion, up 17%. Earnings are expected to end the year up 20% to $10.77.
For the fourth quarter, analysts are expecting $3.29 in earnings per share on a 5.5% increase in revenue. Analysts are looking for revenue of $12.78 billion.
While these numbers are already baked in and I don't expect any major surprises, I think FedEx will be able to increase guidance throughout the year as management gets a handle on its acquisition of European shipping company TNT. Last year, FedEx agreed to acquire TNT after European regulators blocked the deal with UPS (UPS) - Get Report . The FedEx/TNT deal closed in May and I think estimates will have an upward bias all year. FedEx paid €4.4 billion ($4.8 billion) for TNT.
While UPS investors worried the TNT merger would be too complicated as the companies streamlined overlapping delivery networks, there isn't much problem with FedEx. Investors see TNT as a "bolt-on" acquisition that would be accretive to earnings once FedEx is able to improve the company's operations.
This year, FedEx should see 3% accreation to earnings due to the deal. The additional earnings come from margin improvement at TNT. Compared to FedEx, TNT has a horrible operating margin structure. For example, TNT's International European business has a 3.6% operating margin and a 7% margin in the Mideast. TNT's domestic European business has a disappointing 0.9% margin. On the other hand, FedEx's ground operations have a 15% operating margin. TNT's European business is 41% of revenue and its domestic business is 37% of revenue, so just getting those 3.6% and 0.9% operating margins higher should have a big impact on earnings.
FedEx continues to benefit from increased volumes and strong pricing due to the American consumer's endless appetite for buying things on the Internet. Holiday 2015 sales hit a record high and led to strong revenue and EPS growth in the third quarter.
In addition to strong package volume, FedEx has been aggressively saving money by ditching older, more expensive airplanes, and consolidating facilities. As the company completes its $1.7 billion profit improvement plan, I expect management to continue to find ways to cut costs, especially at TNT.
Given the favorable trends the company is experiencing, I see the stock trading as high as $195 (or 16 times fiscal 2017 estimates of $12.13). And 16 times estimates is not a very high valuation for the company. Historically, the stock trades between 12.5 times and 18.5 times forward estimates, so if the economy keeps chugging along, FedEx should be able to deliver for investors.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.